Question

Below is Salem Company’s income statement for 2018 that was prepared by an inexperienced accountant. Salem Company Income Statement As of December 31, 2018 Revenues:

Sales revenue ……………..…………………………………… $298,000

Wages payable…………..……………………………………….. 4,000

Gain on sale of investment…………………………………….. 5,250

Deferred revenue………………………………………………. 2,500

Interest payable………………………………………………… 1,000

Accumulated depreciation……………………………………… 10,000

Total revenues ………………………………………………….. $320,750

Less operating expenses:

Selling expenses….……………………… …………………. $32,250

Research and development expense………………….…….. 4,750

Prepaid advertising …….…………………………………. 3,000

Indirect manufacturing labor cost..………………………… 16,200

Utilities expense..…. .....................………………………… 10,200

Direct manufacturing labor cost. ………………………..… 41,000

Factory equipment………………………………………….. 40,000

Insurance expense…………………….………………. …… 3,500

Restructuring costs………………………………………….. 4,000

Direct materials purchased………………………………..... 93,000

Interest expense……………………………………………. 1,750

Rent expense…..…………….………………. …………….. 18,000

Other factory indirect costs…………………………………. 3,000

Dividend paid………………………………………………. 1,500

Administrative expenses………………….…………………. 40,400

Short-term investment……………………………………… . 19,000

Total operating expenses …………………………………….. 331,550

Net operating loss …………………………………………….. ($10,800)

a. Seventy percent (70%) of utilities expense and 80% of insurance expense are for factory operations. Apply the remaining utilities and insurance expenses equally to selling expense and administrative expenses.

b. Sixty percent (60%) of the rent expense is associated with factory operations. Allocate the remaining rent equally to selling expense and administrative expenses.

c. Factory equipment was purchased January 1, 2017. It was estimated that the useful life of the equipment is 10 years and the residual value, $4,000. The $10,000 accumulated depreciation above is for 2017. No depreciation was charged for 2018. The company uses the double-declining balance method of depreciation.

d. Inventory balances are:   January 1, 2018      December 31, 2018

Direct materials……………… $5,000                                $6,600

Work-in-process …………….. $8,000                               $10,000

Finished goods ……………… $25,000                               $28,000

e. The company’s tax rate is 21%. The president is disappointed with the results of operations and has asked you to review the income statement and make a recommendation as to whether the company should look for a buyer for its assets. Required:

1. As one step in gathering data for the president, prepare a corrected schedule of cost of goods manufactured for the year ended December 31, 2018.

2. As a second step, prepare a new multiple-step income statement for the year ended December 31, 2018.

3. Calculate the cost of producing one unit if the company produced 120,000 units in 2018 (round your answer to two decimal points).

Answer 1

1 & 2 Corrected Cost of Goods sold schedule and multiple step income statement as below:

Income statement of Salem company for the year ending December 31, 2018
	Description	Reference	Amount ($)	Amount ($)
Sales Revenue		A		298,000.00
Cost of goods Sold:
	Purchases - Change in Inventory		6,600.00
	Direct Materials purchased		93,000.00
	Direct Manufacturing labor cost		41,000.00
	Utilities Exp (70%)		7,140.00
	Insurance Exp (80%)		2,800.00
	Rent Exp (60%)		10,800.00
Total Cost of Goods Sold		B		161,340.00
	Gross Profit	C = A-B		136,660.00
Operating Expenses:
	Indirect Manufacturing labor cost		16,200.00
	Other factory indirect cost		3,000.00
	Selling Expenses		32,250.00
	Utilities Exp (15%)		1,530.00
	Insurance Exp (10%)		350.00
	Rent Exp (20%)		3,600.00
	Administrative Exp		40,400.00
	Utilities Exp (15%)		1,530.00
	Insurance Exp (10%)		350.00
	Rent Exp (20%)		3,600.00
	R&D Expenses		4,750.00
	Restructing cost		4,000.00
	Depreciation (40000-4000)*(100%/10yrs*2)		7,200.00
	Total Operating Expense	D		118,760.00
Non - Operating Expenses:
	Interest Exp		1,750.00
	Dividend Paid		1,500.00
	Total Non- Operating Expense	E		3,250.00
Non-operating / Other Income
	Gain on sale of investment			5,250.00
	Total Non- Operating Income	F
	Net Profit before tax	G=C-D-E+F		19,900.00
	Tax @ 21%	H		4,179.00
	Net Income after taxes	G-H		15,721.00

3. Assume company produced 120000 units for year 2018, then cost per unit would be

Total cost of goods sold = $ 161,340 divided by 120,000 units = $ 1.34 per unit (rounded off to 2 decimal places)